We have a strong preference for value pricing for legal services. Value pricing is a term used to describe a pricing model that sets fees based on the value of the work done for the client. Value pricing is done before the work begins so that you know how much you can expect to pay ahead of time.
This firm uses a value pricing model for most situations. Here’s how it works:
- You provide the attorney with basic information about your situation, including the facts involved and the goals of the representation.
- You and the attorney discuss the options available to you. The attorney can help you evaluate the pros and cons of each option and chose the quickest and least expensive way to reach your goals.
- Once a decision is made, the attorney develops a scope of work and gives you a customized, fixed fee before representation begins. As long as the scope of work does not change due to unexpected circumstances, this fixed fee is the amount you can expect to pay.
The up-front fee model allows you to weigh the costs of legal representation against the benefits and make an informed decision about how to proceed with your legal affairs.
Value pricing also encourages open communication between attorney and client. Because you are not “on the clock” for every phone call or e-mail, you can contact the attorney with your questions, knowing you won’t be nickel-and-dimed for every response.
What Value Pricing Means for You
Value pricing offers several distinct advantages over the traditional hourly billing model. Value pricing benefits both the client and the attorney by providing clarity and predictability.
- Value pricing provides a defined scope of work. You know in advance exactly what work will be done. Anything outside of the scope of work is outside of the price.
- Value pricing provides price predictability. If the scope of work remains the same, you will know in advance exactly how much you can expect to spend.
- Value pricing prevents upsells and scope creep. Because the work is defined in advance, you need not worry about being nickel-and-dimed for additional services.
These advantages make value pricing a good fit for most legal matters. It is not, however, an invitation to take advantage of the attorney’s time and effort. For value pricing to work, each party to the representation must treat the other with understanding and respect. Here are a few pointers for effective use of value pricing.
- Items that are not included in the scope of work are not included in the fee quote. If additional services are needed, the attorney will either quote a separate fixed fee or handle the work on an hourly basis.
- Unless specifically included in the fee, the fixed fee does not include third-party costs.
- Value pricing assumes that the client will respond promptly and that the representation will be concluded promptly.
- Value pricing also assumes that the client will review any documents when requested so that the attorney can make any necessary changes in a timely manner. Value pricing does not give the client lifetime access to request document changes months after the representation begins.
- Value pricing assumes that the attorney has complete and accurate information about the representation. The attorney is not responsible for changes to the facts that substantially affect the scope of work. If new information or a change in circumstances occurs, the attorney may need to increase fees (either by quoting additional flat fees or by switching to hourly billing).
Following these guidelines will help ensure a successful pricing outcome for both client and attorney.
Why Hourly Billing is Sometimes a Necessary Evil
Value pricing is often distinguished from the more traditional hourly billing model used by most law firms. Instead of focusing on the value provided to the client, this model focuses on the work done by the attorney. While nothing is unethical about hourly billing, it has a few major drawbacks:
- Rewarding Inefficiency.The hourly billing model rewards inefficiency. The attorney is paid more for putting more time into the matter, even if the additional work adds little value to the client. Instead of being motivated to complete the matter quickly and efficiently, the attorney is rewarded for taking more time to complete the work.
- Unclear Expectations. Costs are difficult to forecast in the hourly-billing model. In many cases, all that the attorney can say is that the cost will depend on how much time is spent on the matter. Many clients are not familiar with how much work can go into a matter. Without an up-front cost estimate, clients often have unrealistic expectations about the total amount that they expect to spend. This can lead to unpleasant surprises when the final bill arrives.
- Stifled Communication. Hourly billing can stifle attorney-client communication. When a client makes a 15-minute phone call to an attorney that uses an hourly-billing model, the client will be billed for .25 hours of attorney time. Assuming the attorney’s hourly rate is $250, every 15-minute call will cost the client $62.50. The natural result of this model is to discourage attorney-client communication. Because the client is reluctant to contact the attorney, questions go unanswered and concerns are not addressed.
The value pricing model doesn’t suffer from these drawbacks. It rewards the attorney for being more efficient in handling the matter, it provides the client with an up-front fee quote so that the client knows what to expect, and it allows the client to communicate freely with the attorney, without fear of unpleasant surprises when the bill comes.
For these reasons, we have a strong preference for value pricing over hourly work. But there are situations where the value pricing model breaks down:
- Undefined Scope of Work.Sometimes the scope of work is impossible to define in advance due to the open-ended nature of the project. This often occurs in transactions that involve negotiation, due diligence, or document review. In these situations, there is usually no choice but to use hourly billing for some or all of the project.
- New Information or Changes in Circumstances.The value pricing model assumes that the attorney has accurate and sufficient information to estimate the work involved in the representation. If the scope of work changes due to new information or changed circumstances, the scope of work may increase substantially. In this situation, adjustments are needed to fairly compensate the attorney.
- Interrelated Issues to Address. If there are multiple issues to address and the scope of work for one issue is dependent on the resolution of other issues, then the attorney may not be able to provide an accurate estimate of the overall project scope.
When the value pricing model will not work, we use hourly billing. We have a two-hour minimum on all matters handled through hourly billing.